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UBS Gets Boost From Wealthy Asians as Investment Bank Trails

Marion Halftermeyer and Patrick Winters
UBS Gets Boost From Wealthy Asians as Investment Bank Trails

(Bloomberg) -- UBS Group AG got a boost from rich Asian clients in a quarter hit by a poor result at the investment bank and lower income from lending as interest rates have languished.

The key wealth management unit added $15.7 billion new money in the three months through September, helping lift assets overseen for the affluent to a record $2.5 trillion, UBS said Tuesday. While profit beat analysts’ estimates, UBS said it will book a roughly $100 million charge in the fourth quarter to restructure the securities unit, and warned that lower interest rates will continue to squeeze income.

“Market conditions in the last few quarters have been very challenging,” Chief Executive Officer Sergio Ermotti said in an interview with Bloomberg TV. That’s particularly true for the investment bank, which is “much more skewed towards Europe and Asia” than the U.S.

Ermotti is seeking to turn the corner after a year marred by huge legal fines, questions about succession planning and a slump in the share price. In August, he shook up the management board, hiring former Credit Suisse Group AG banker Iqbal Khan to co-run global wealth management and positioning him as a potential successor. But Khan’s start at UBS was overshadowed by a spying scandal that exposed a deep rift with his former boss.

UBS was one the first banks to pivot away from investment banking and toward wealth management after the financial crisis, becoming a model for rivals including Credit Suisse. Still, increasing competition for rich clients, negative interest rates and a slowing economy are putting pressure on that business. That’s showing on the bottom line, as lower adjusted pretax profit at the wealth business contributed to a 16% decline in third quarter group net income. Ermotti said Tuesday that he plans to update investors on its targets in January.

UBS was up 1.2% at 1:34 p.m. in Zurich trading. Before today, shares of the lender had lost 6.5% this year, compared with a gain of 15% at Credit Suisse, where a three-year restructuring modeled on UBS’s pivot to private banking started to bear fruit. To lift the stock, UBS has earmarked $2 billion for share buybacks through 2020. It is nearing its $1 billion target in buybacks this year.

“UBS continues to have the best wealth-management franchise, best business mix in a new regulatory regime,” analysts Kian Abouhossein and Amit Ranjan at JPMorgan Chase & Co. wrote in a note. “Although the investment bank performance is relatively weak compared to U.S. peers, we have to take into account” the geographic and business focus of the bank.

Global wealth management is by far the biggest of UBS’s units, contributing more than twice as much revenue and pretax profit last year as the investment bank. A prolonged period of low rates is eating into earnings from lending, with net interest income at the business declining about 3% from a year earlier, and recurring fee income falling as well.

UBS said in August that it would expand a policy of charging affluent clients for excess cash holdings. Clients will start feeling the impact on Nov. 1 when the policy comes into effect. The bank doesn’t plan to pass on negative rates to retail clients, Ermotti said.

Ermotti said Tuesday that he asked Khan to assess the wealth management franchise and, along with co-head Tom Naratil, report back to him with ideas to improve it by December.

Khan, in a memo to employees after he started this month, pointed to “unrealized potential” within the wealth management business. Key will be his take on developing UBS’s offering to wealthy clients in Asia, a region that wasn’t under his control at Credit Suisse and which contributed $10.9 billion in inflows in the third quarter. In the U.S., which is overseen by Naratil, wealthy clients stayed broadly put.

Click here to watch the full 10-minute interview with CEO Ermotti.

Khan joined under a cloud after it emerged that Credit Suisse had private investigators follow him to make sure he didn’t try to encourage others to defect. The scandal exploded onto the front pages of local tabloids and exposed a personal feud between Khan and his former boss, Tidjane Thiam. One of Thiam’s top lieutenants left the bank after he was found responsible for ordering the surveillance.

Trading Unit

Ermotti is also making changes to the investment bank, reshuffling senior management and combining trading operations in changes that may ultimately eliminate hundreds of positions, people with knowledge of the plan have said. The bank is cutting about 40 jobs in the Asia-Pacific region as part of the shake-up, a person familiar with the matter has said.

The restructuring should save the bank about $90 million annually, Ermotti said in an interview with Bloomberg TV, adding that job losses won’t be significant. The bank doesn’t plan to change its investment banking “footprint,” Chief Financial Officer Kirt Gardner said on a conference call. Job cuts will be broad-based and at a senior level, he said.

Adjusted pretax profit at the unit fell 59% from a year earlier, as the bank earned less from advising on deals as well as from trading. Equities trading revenue declined almost 7%, compared with a gain of about 1% at the five biggest Wall Street firms. UBS is seeking to boost collaboration between dealmakers and its wealth-management unit, while sharpening a focus on industries most of interest to its richest clients.

The asset management unit, which caters to less wealthy investors and institutions, won $24.1 billion in long-term net inflows, a bright spot for a unit that’s overshadowed by the much larger wealth management business.

UBS has had a rocky year so far. It was dealt a $5 billion penalty in a French tax case in February that it intends to appeal. After warning of a difficult market in the first quarter, it announced $300 million in additional cost cuts. Ermotti previously signaled that the bank may struggle to reach its 15% adjusted return on tangible equity capital, instead saying that the bank could achieve a level on par with last year’s 13% return.

(Updates with decline in net profit in fifth paragraph.)

--With assistance from Nicholas Comfort, Manus Cranny, Donal Griffin and Jan Dahinten.

To contact the reporters on this story: Marion Halftermeyer in Zurich at mhalftermeye@bloomberg.net;Patrick Winters in Zurich at pwinters3@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Christian Baumgaertel, Ross Larsen

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